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Is Sky a plus for ITV?

It seems astonishing that shortly after his soggy nomans land warning about the likes of ITV2, James Murdoch should write a cheque for 940m to buy a share of ITV. Yes, he wants to keep Virgin at bay, but he also has plans that could dramatically change the TV ad market. By Dominic Dudley.

A “soggy no-man’s land” is not the sort of place anyone would want to be. But it is the reality awaiting many commercial broadcasters, according to James Murdoch, chief executive of BSkyB.

Now many observers believe he has increased his exposure to it by buying almost 18% of ITV for £940m at the end of last week.

The two are not unconnected. A few days earlier, at an Internet Advertising Bureau (IAB) conference in London, Murdoch had laid out a future where brands would only want to advertise to very large audiences, or very small, specific ones (MW last week). Anyone in that no-man’s land in the middle would be caught out – and that spells trouble for Sky Three, ITV2, Bravo and their many peers.

This helps explain his move for ITV. While ITV1 is struggling with falling advertising and viewing figures, it is still one of the few commercial channels able to deliver big audiences. There are also competitive reasons. By buying a sizeable stake he gains access to that large audience but he has also made it harder, or at least more expensive, for NTL/Virgin Media to get its hands on ITV and its viewers.

“The smart brands will gravitate to the twin poles of mass reach and niche targeting,” said Murdoch at the IAC conference. “Advertising online or on a specifically designed television channel allows you to target the right demographic with a great deal of efficiency. But in the age of multiplying niches, mass audiences start to matter a lot more too.”

Murdoch’s analysis of the future of TV advertising is provocative. But is he right and, other than his theatrical purchase of ITV shares, what other solutions are out there?

Unfamiliar TerrainFinding the right answer is critical for all broadcasters wondering what their place is in the new, fragmented multi-media landscape.

As it stands, interactive television advertising is stagnating. According to Continental Research, just 16% of Sky Digital homes have hit the red button to interact with a TV ad in the past 12 months – down from 17% earlier in the year. The costs of reaching people in other ways are high. Rupert Murdoch, chairman of News Corporation, which owns a minority stake in Sky, told analysts last week that the Sky Broadband roll-out would hit profits harder than previously expected.

In James Murdoch’s scenario, second-tier channels like Sky Three and ITV2 are doomed because they offer neither depth nor breadth to advertisers. Broadcasters have seen them as a good way to segment their audience while keeping advertisers happy. Murdoch does not think they do either job well enough.

But not everyone agrees. Benedicte van Boxel, senior account director at integrated creative marketing agency the Picture Production Company, says/ “There is still room in the middle for channels with a clear brand proposition and a clear idea of who their audience is. If you consider E4, More4, BBC3 and BBC4 – in a multi-channel environment, those brands act as a signpost.”

Technology is KingThe changes in the media landscape are being driven by technology. Viewers are being drawn to these new TV channels as more become available and the internet is taking an ever-greater share of overall media consumption. Sky has been getting involved in this itself, launching broadband services, TV-over-mobile and its Sky Plus box. Technology is forcing the changes, but it can provide a solution too.

One way is online, video-on-demand services. This enables the audience to self-select, only downloading the programmes they want to watch, and online measurement tools make it relatively easy for brand owners to target the right people.

Channel 4 unveiled its service last week, called 4oD. Viewers will have up to 30 days after programmes are first broadcast to watch a repeat. Channel 4 new business director Rod Henwood says it will be experimenting with several business models including pay-per-view, subscription, ad-funded and free.

ITV is expected to unveil a video-on-demand service next year, and the BBC has also been working hard on a Web-based service.

But perhaps Murdoch has a better solution. He says Sky Plus boxes will soon be able to deliver ads tailored to each household, based on what they have been watching – something he calls “Smart TV”. This involves a far smaller change in behaviour from consumers, who can continue to simply flick through the channels until they find something they like (rather than log on, search and download), while offering advertisers a targeted market.

“The real breakthrough in targeting niches comes in the application of information about consumers,” says Murdoch. “Every Sky Plus box being installed has reserved capacity for enhanced services. One of the most exciting new applications taking advantage of that is to use the space as a local ad server, inserting ads relevant to you the viewer according to your revealed preferences.

“Over a million boxes with these hard drives are already installed in homes across the country. This technology will be ready to be commercialised over the next 12 months.”

Homing InIn theory, two households could be watching the same programme but receive different ads. For example, if one has been watching a lot of children’s programmes for the first time, there is a good chance they have a new baby and a car company might want to target the family with a larger car during the ad break. During the same break their neighbours, who had earlier been searching for weekend activities on Sky Broadband, could be shown ads from the National Trust.

Alan Morgans, director of interactive services at Tinopolis, the TV production company behind Robot Wars and Question Time, thinks Sky has a better strategy than Channel 4. “I’m with Murdoch,” he says. “It’s the more sophisticated approach. In the long run that’s the way the market’s heading.”

As with any new technology, there are likely to be some teething problems. “It’s in its infancy and there will be problems and mistakes made,” says Ben Hart, co-founder of interactive TV advertising specialist Weapon 7 and now chief executive of digital marketing agency Glass Partnership. However, he adds that the benefits are clear: “Personalisation is not only an attractive differentiator for advertisers but presents significant a benefit in terms of measurable return and results.”

Broadcasters are quickly having to learn lessons from the internet where such personalisation techniques are far more developed. If they do not, then Murdoch’s prediction of a soggy future could well come to pass, as advertisers turn their attention elsewhere and abandon many of the generalist channels with their unfocused audiences.

As far as the truly big audiences are concerned, Sky insists it has no desire to buy up the rest of ITV (which it can’t anyway, for competition reasons). But with his newly bought share of the company, Murdoch can make sure that his chief commercial rival finds it too difficult or expensive to do so either.

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